2.3 Mutual Credit on the Blockchain

While limited in scope, examples such as WIR, IMS, Itex, and the multitude of LETs around the globe, demonstrate the potential of mutual credit as a solid foundation for stable currencies, designed to facilitate trade. Especially the example posed by WIR elucidates how a mature mutual credit system naturally evolves into a commodity-backed currency system, proven to be resilient to systematic financial shocks, often outperforming officially issued fiat currencies.

From the history of mutual credit we also learn that treating credit as both a natural consequence of, and a requisite to production, trade, and consumption, radically improves its impact on both the economy as well as society at large.

However, traditional mutual credit initiatives as they are described above, are normally closed systems, with rigid membership structures, operating under tight central control. This naturally limits the scope of these networks and the utility of the currencies arising from their activity. It also delegates an enormous amount of control to the operators of these systems, which over time and with expanding ambits, tend to develop the same dynamics as traditional banks.

Distributed Ledger Technology is the ideal tool to alleviate these shortcomings. Based on recent developments in Decentralized Finance, such as algorithmic stable coin designs, automated market making, decentralized insurance, digitally transferable legal debt contracts, and other “Money Legos”, in conjunction with distributed governance schemes, new, groundbreaking mutual credit applications can be envisioned.

Using Blockchain technology, currency units arising from the activity of mutual credit networks can be rendered into universally accepted stablecoins which transcend the confines of a closed-loop membership-based market. Such a development would allow clients of mutual credit to access “real-world” liquidity, akin to loans available on traditional financial markets, at rates and terms no bank can compete with. Moreover, and maybe more importantly, a stablecoin, deriving its stability from the organic market forces posed by mutual credit networks and the commodities traded within it, would revolutionize Decentralized Finance.

To date, available forms of “Blockchain Money” comprise speculative assets (such as Bitcoin, utility and governance tokens), and assets artificially pegged to an external currency (such as DAI, USDT, etc). A mutual credit-based stable coin would be the first native form of “Internet Money”, independent from national currencies while achieving stability by virtue of its own internal dynamics.

Recent developments in algorithmic underwriting, staking-based insurance models, and reputation-based governance, allow to expand mutual credit above and beyond the scope of a single venture, project, or startup. The time is ripe to develop mutual credit as a universally accessible protocol layer, which will provide liquidity, a medium of exchange, and a store of value, native to the internet itself, independent of state-run or corporate entities.